Updates on tax evasion and avoidance
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Completing a tax return is a necessary evil that some 11 million people in the UK grapple with each year. Simplifying this process seems like a positive step. The fact that tax evasion is made more difficult and the margin of error minimized should also be welcomed. But new powers granted to HM Revenue & Customs and the drive to digitize data collection raises uncomfortable questions about confidentiality and accountability.
For many who keep digital records of VAT returns, a longstanding policy of “digitizing taxes” is already a reality. It is to be rolled out more widely in 2023. The Office of Tax Simplification, a statutory body, has recommended that HMRC collect more information from a wider range of third parties who would “pre-fill” or auto-fill tax returns with information that would then be checked by the taxpayer. It may seem attractive to have charitable donations or taxes from stock sales calculated in a tax return. The question arises, however, of who is responsible when an error – not unknown in HMRC reporting – sneaks in from data from outside sources and embeds itself in a technology that is then difficult to correct.
Activists and professionals are rightly concerned about a repeat of the Post-Scandal in which dozens were wrongly convicted of a faulty computer system. Hacks are also a problem when data is centralized, especially when it comes to a creaky government system.
Meanwhile, the new powers coming into effect this year will allow tax authorities to solicit information about individuals directly from banks and financial institutions without the consent of the individual taxpayer or a court of law, as is currently the case. While there are understandable benefits to strengthening HMRC’s intelligence-gathering powers when it comes to tackling fraudsters, a House of Lords subcommittee described the move as a disproportionate use of powers in the absence of adequate security.
Honest mistakes and a lack of “reasonable care” add up to around £ 8.6bn of the UK’s so-called tax gap of 31bn. It is then perfectly legitimate for HMRC – whose job it is to raise revenue for the treasury – too try to minimize the accuracy. But UK tax law is devilishly complex. No wonder the tax returns contain inaccuracies. Better pressure could be put on to simplify tax law and reduce loopholes that the well-endowed people can exploit. Furthermore, the Directive does little to combat overt tax evasion and persistent criminal behavior. All in all, tax evasion, criminal attacks and the hidden economy make up nearly £ 12 billion of the tax gap.
HMRC’s policy would be more palatable if there was an equal push to achieve more harmful circumvention. While a separate unit was set up in 2016 and the tax authorities claim they have 400 investigations into “savvy criminals”, those efforts have yet to be translated into further prosecutions. The number of people charged with tax evasion halved between 2016 and 2020. Of the 548 people charged, only 32 were considered wealthy, despite the fact that HMRC promised to launch around 100 prosecutions of wealthy and corporate escapes each year.
The UK’s pandemic-ridden economy has forced the Treasury Department to increase HMRC’s resources to tackle coronavirus-related fraud. That should help fight wider tax evasion. But when it comes to modernizing tax returns for honest taxpayers, it is important that HMRC outline how it balances simplification and accountability to reduce the tax burden.